Creative destruction

Creative destruction

Enterprise applications used to be the proverbial diamonds of the IT-services market - a solutions integrator's best friend.

Just as you could count on relentlessly falling prices for computer and networking hardware, you could likewise be sure that enterprise software would stay relatively resistant to commoditisation.

Sure, there has been downward price pressure on complex business-process software, but it's been nothing compared to that on the hardware running it.

Until now, that is. Welcome to the age of the application service provider (ASP), where information creation and processing capability is delivered to companies via the Web or a leased line just like any other utility. ASPs own the software licences and essentially lease pieces of a package to customers for a flat monthly fee, or per number of users or transactions, depending on the app.

The ASP model basically invites expensive software to get diced up by a cost-per-transaction service. This model is fundamentally at odds with the old model of pricing enterprise software. Where bundled, turnkey packages are licensed to end users for a one-time charge.

As every successful solutions integrator knows, product bundling and customisation have been two stalwart buoys of profit margins. But ASPs introduce a "one-to-many" business proposition, servicing multiple companies from a single, centralised data centre.

Hence Ed Thompson, vice president of sales and marketing for ServiceNet, observes that his firm "simply offers the 90 per cent solution without the detailed customisation - but with fixed pricing, uptime, and other service-level guarantees".

Customers sign up for specific functionality, as well as performance and service levels - but not for specific software brands.

Thompson contends, however, that customers "don't really care" which database or accounting package is used, as long as it meets their needs. Whoa! Don't Baan, BroadVision, Great Plains Software, Lotus Development, Oracle, PeopleSoft, Siebel Systems, and other enterprise software vendors forging partnerships with ASPs get it? Not only do ASPs bring a utility mindset to the complex-software business, undermining the core value-rationale that vendors have historically used to justify five and six-figure price tags for their products, but branding is eroded, too.

My guess is that software makers do understand the danger of hitching their wagons to the ASP star, but the risk is unavoidable.

These vendors must grow substantially to survive, and the 80,000-plus companies in the US middle market - where most ASPs focus - obviously present the greatest growth potential.

Necessary gamble

Opting out of the ASP distribution channel means ceding this growth opportunity to rivals. That the ASP model, in its pursuit of the greatest value for the least cost, happens to be an engine of "creative destruction" is simply a necessary gamble for enterprise software makers.

While these vendors figure out how to play a high-volume, low-service game without cannibalising their core business (good luck), solutions integrators must decide whether partnering with or building an ASP company makes sense.

As I've said before, I believe the ASP model is a viable business extension for integrators.

But it requires a thorough understanding of application hosting and service-bureau operations, not to mention vertical-market or discrete business-process expertise for a sustainable competitive advantage. Because one thing is clear: the days of fat margins from general enterprise applications are numbered.

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